GMAC: The scariest zombie

NEW YORK (Fortune) -- Now that Citigroup and AIG are rolling in the bucks, GMAC is looking like the most egregious zombie bank of them all.

A report released Thursday questions the wisdom of the government's decision to spend $17 billion propping up the money-losing maker of car and home loans.

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Elizabeth Warren's TARP oversight panel questions Treasury's investment in GMAC.

The report, released by the Congressional Oversight Panel, noted that the White House thinks taxpayers will lose at least $6 billion on the GMAC bailout. Two members of the panel projected that losses could reach $10 billion, based on the expected cost of the bailouts of GM and Chrysler.

But that's not the worst of it. Thanks to Treasury's decision to avoid a comprehensive restructuring of the company, pre-bailout shareholders in GMAC -- including private equity firm Cerberus -- could still profit on their investments, the report said.

And while the costs are mounting, the panel, chaired by Harvard law professor Elizabeth Warren, said it remains unclear what Treasury accomplished by shielding GMAC from bankruptcy.

The panel also questioned the government's decision to bail out the entire company rather than simply supporting its auto-lending unit, and how GMAC might return to sufficient profitability to begin repaying its obligations.

In its report, the panel said it "is deeply concerned that Treasury has not required GMAC to lay out a clear path to viability or a strategy for fully repaying taxpayers." It called on Treasury to "clearly articulate its exit strategy from GMAC."

GMAC chief Michael Carpenter told the panel last month that the company hopes to conduct an initial public offering within two years to repay taxpayers. But to say observers are skeptical about the prospects for an IPO would be an understatement.

"In my view, GMAC badly needs to be restructured before it will have a real possibility of revival," bank watcher Chris Whalen of Institutional Risk Analytics told the panel last month. He said the company's misguided expansion beyond car lending "threatens the viability of GMAC."

Thursday's report comes at a time when the prospects for some of the most notorious bailout beneficiaries have started to turn up a bit.

AIG (AIG, Fortune 500) is on track to repay $51 billion of federal aid, thanks to two recent asset-sale agreements. Fortune's report that value investor Bruce Berkowitz is buying Citi (C, Fortune 500) shares helped spark a rally this week in that beaten-down stock.

The outlook for what is shaping up as the costliest bailout, the 2008 takeover of Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500), isn't brightening -- but at least it's clear how the companies fit into the government's effort to support an economic rebound.

That's not at all the case for GMAC, which is best known as a car lender but has been hemorrhaging billions of dollars thanks to its subprime home lending spree.

GMAC's mortgage operations lost $15 billion over the past three years and the company has spent recent months attempting to limit its exposure to further losses at its main mortgage business, ResCap.

The report suggests a bankruptcy for all or part of GMAC, particularly ResCap, should have been given strong consideration when the bailout decision was initially made in 2008 and again when additional support was injected in May and December 2009.

But the government instead chose to support the entire company, first by permitting GMAC to convert to a Federal Reserve-regulated bank holding company and then by administering repeated infusions of taxpayer support. Last year's bailout decisions, the report says, appear to have been clouded by Treasury's desire to avoid taking a loss on its initial $5 billion investment.

Allowing GMAC to proceed as is looks especially questionable in light of the $6 billion that the company has channeled to ResCap, which it is trying to sell.

"Given ResCap's limited available capital and liquidity, its ongoing existence and viability have remained highly doubtful without continued contributions from its parent," the report said. "GMAC's contributions to ResCap would not have been possible, however, had GMAC not received TARP assistance."

Treasury isn't the only arm of the government exposed to GMAC's problems. The Federal Deposit Insurance Corp., the guarantor of the increasingly stressed-out deposit insurance fund, is backing $7.4 billion of GMAC bonds issued under a crisis-era program that helped to restart the credit markets.

That program has so far been a success, drawing $10 billion in fees for the FDIC and allowing banks to issue more than $300 billion of low-cost debt.

GMAC sold bonds this month without federal backing for the first time since the crisis. But the company is paying a steep 8% yield on those bonds, which the panel noted will weigh on its finances.

What's more, GMAC will have to repeat the feat many times to have any hope of standing on its own two feet. The company has $59 billion of debt maturing over the next three years, the Congressional Oversight Panel said.